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Bloomberg on the Market: Housing Starts Rise

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10-19-2005

Bloomberg on the Market, Mike Schneider
 
MIKE SCHNEIDER, anchor: We do want to, though, also tell you that he news we got about 17 minutes ago, surprising news, regarding the housing market. There had been an anticipation that housing starts and building permits might start to back down a little bit because of rising interest rates and some other economic issues in this country. Didn't happen at all: in fact we saw housing starts and building permits rise.

Building permits were up to 2 million 189,000, which is substantially higher than the consensus figure, the estimate that had come from economists that were surveyed, and housing starts, which were projected to drop into below 2 million. In fact, rose to 2 million 189,000, which is a gain of about 80,000 from the previous month, so obviously the housing market confounding some who had expected a drop-off. We want to get into more detail about that right now and analyze it a bit.

Joining us now from San Francisco with more on what the numbers mean, Hugh Bromma, he's the CEO of the Entrust Group. Hugh, appreciate it.  First of all, did the numbers catch you by surprise?

Mr. HUGH BROMMA (CEO of Entrust Group): Yes they did, as a matter of fact, I was along with everybody else that expected that the numbers were going to be stable or dropping.

SCHNEIDER: What do you make of it? I mean there was a sense that housing was going to get more expensive, people were going to get more conservative in their buying habits, and numbers were going to go down.  So what part of that equation didn't pan out?

Mr. BROMMA: I think that consumer confidence that the housing market and in general is still robust is what is fueling this. I don't now that it is going to continue on forever, because we're going to be seeing the rise of interest rates and we're probably going to be seeing 6 percent by the end of the year, and certainly 2006 rates are going to increase as well. But at this time it looks like the housing market is good to go.

SCHNEIDER: But if I understand you correctly, then what you're saying then is that the drop-off may be delayed, but it will not be denied.

Mr. BROMMA: That is correct.

SCHNEIDER: How does that affect your business?

Mr. BROMMA: In our business, we have primarily investors that are looking at the second home market. They're not really second homes, they're actually investment properties: in our industry it's real estate that is purchased by individual retirement accounts and 401(k)s. And what we've seen is a dramatic increase over the last couple of years of individuals using retirement funds for that purpose. This is just going to continue to increase that capability among people.

SCHNEIDER: How much longer?

Mr. BROMMA: I would expect probably by second quarter we're going to see that probably go down a bit when interest rates really start to pop in, and also we're looking at commodity price increase, too, so the cost of housing is going to increase as a result of commodity price increases.

SCHNEIDER: So it almost actually adds up to a perfect storm for a drop-off, because you do have the rising interest rates and as the commodity prices go up, housing prices must go up as well. How much can they continue to go up, though? It's got to be a question of, at some point, though, just saying, if I want to sell these things, I'm going to have to, you know, bite the bullet and eat some of the costs.

Mr. BROMMA: That's right, and what we're going to see I believe is not a cliff, but I think we're going to see a gradual drop-off as the builders were saying, we're going to have some experience in increased housing costs, and other construction costs, and individuals start to soften up in terms of their buying propensities.

SCHNEIDER: Given all that, would you expect whatever drop-off to occur to be national in scope? We always hear that housing really is a much more of a regional and local story. What do you think certain localities are more likely to be hit harder, essentially?

Mr. BROMMA: Well what we've seen, the Northeast is not particularly let's say in the area where we're seeing expansion, but the West is still robust and the South continues to be relatively robust, and where we see the softening happening is in the South and in the West. Midwest has been relatively stable.

SCHNEIDER: All right. Give me a sense, I guess, if you can characterize your particular mood at this moment, with all that in mind, what would it be?

Mr. BROMMA: I'm still upbeat about it, I think that what everyone needs to be cautious in terms of what it is that we're going to be seeing, let's say over the next six months, to see what's happening there. I believe that we're going to see a softening in the market because of interest rate and commodity price increases, and that the inventories are going to start going up gradually.

SCHNEIDER: All right, Hugh, have to leave it there. We appreciate it.  Hugh Bromma, the CEO of Entrust Group, thank you very much, sir. Do appreciate it.

Mr. BROMMA: Thank you.